Working Capital Case Study

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A2: Working Capital
An imperative concept for any business is to know how to best adjust their assets for growth. This concept is called working capital. Net working capital is the company’s current assets minus liabilities and gross working capital is the company’s total current assets (Investopedia, 2013e). Net working capital demonstrates a company’s ability to pay back short-term liabilities using their current assets. The necessary working capital depends on the size of the company, and a diminishing or too high amount can be an indicator that assets are not being used prudently or there is excess liability. With a solid working capital, a company can determine where they can grow and best take future risks. This all culminates in the concept of an operating cycle, or the time necessary to change assets into useful resources and then again into assets.
Following is the net working capital for Competition Bikes figured using the net capital model of assets - liabilities = net working capital:
Year Assets Liabilities Working Capital
Six $1,029,303 $105,080 $924,223
Seven $1,353,044 $233,700 $1,119,344
Eight $1,575,831 $300,200 $1,257,631
The amount of working capital for Competition Bikes has steadily grown every year. Because of the manner in which they have distributed their assets and liabilities, they are not benefitting the best way possible. Their cash and equivalents grew more than $300,000 from year seven to eight. The excess money however was not used to invest in new product ideas or to pay debt, hurting their working capital. They also had an increase in their accounts payable during this same time by $65,300 showing they do not pay off debt when they have the money to do so. They experi...

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...ociated with not complying with the law, such as fines or even being shut down is possible. Making sure their executives are up to date on the legalities and being compliant with the laws will in turn help with the shareholders being much more supportive and the company’s financial future will be much stronger.
Conclusion
In conclusion, Competition Bikes is a young company that has had to confront some challenging issues such as expansion, revenue losses, product changes and a poor economy. While the company has strived to make adjustments and grow in these areas, it has also had to deal with problems in their internal business processes, finances, and not being compliant with the law. By making the needed changes to these problematic areas, and becoming compliant with federal law, they stand a good chance at being a strong, competitive and profitable company.

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